KB Financial issues 4.8% perpetuals to repay 3% bonds

KB Financial Group is issuing hybrid capital securities at a higher interest rate to repay existing unsecured senior bonds. Despite the increase in interest costs, the move is underpinned by a strategy to bolster capital adequacy metrics, as hybrid capital securities are recognized as capital under accounting rules.

According to investment banking industry sources, KB Financial Group secured 471 billion won (about $348 million) in institutional orders during book-building on Nov. 4 for its 16th hybrid capital securities issue worth 270 billion won (about $199 million), representing 1.74 times the offering amount. Buoyed by strong demand, KB Financial is considering increasing the issue size to up to 400 billion won (about $295 million). If the 270 billion won (about $199 million) issue proceeds as planned, the coupon will be set at 4.82% per annum, near the top of the marketed range of 4.30% to 4.90%.

The issuance draws attention for its funding structure and purpose. According to KB Financial's use of proceeds plan, 200 billion won (about $148 million) of the funds will be used to repay the 50-1 unsecured senior bonds maturing in January 2027. The remaining 70 billion won (about $52 million) is earmarked to refinance existing hybrid capital securities with a call option scheduled for February 2027.

The key is the interest rate differential. Senior unsecured bonds issued by financial holding companies typically carry the highest credit rating of AAA, with coupons in the mid-to-high 3% range due to low spreads over Korea Treasury Bonds. In contrast, hybrid capital securities are classified as deeply subordinated bonds, ranking just ahead of common equity, and receive a rating two notches lower at AA-. Investors demand a high absolute yield in the high 4% range to compensate for the risk. In effect, KB Financial is issuing perpetual bonds at over 4.8% to repay 200 billion won (about $148 million) of senior bonds with coupons in the 3% range.

The reason for accepting higher interest costs is that hybrid capital securities are fully recognized as additional Tier 1 capital, not debt, under accounting rules. Ordinary corporate bonds, regardless of size, do not contribute to capital ratio calculations and remain as simple liabilities. Replacing senior bonds with hybrid capital securities increases both total capital and Tier 1 capital, lifting the BIS total capital ratio and Tier 1 capital ratio by about 0.05 percentage point.

The financial sector is currently in a structure where risk-weighted assets steadily increase with asset growth. On top of this, financial authorities are strengthening stress capital buffer regulations, and market expectations for expanded shareholder returns through dividends and share buybacks have risen. This is why KB Financial chose to defend its capital ratios despite the interest cost burden.

KB Financial raised 433 billion won (about $320 million) at 4.50% in May and issued another 400 billion won (about $295 million) at 4.85% in August, bringing its hybrid capital securities issuance this year to 833 billion won (about $615 million). If the 270 billion won (about $199 million) target from this book-building is raised, the annual issuance will reach 1.103 trillion won (about $814 million). If the amount is increased to the maximum of 400 billion won (about $295 million), this year's capital-qualifying fundraising will swell to 1.233 trillion won (about $910 million). With coupons being set at the top of the marketed range in November following August, the perpetual interest costs the company must bear continue to accumulate.

The overlapping funding schedules of financial holding companies have also contributed to the rise in rates. Hana Financial Group, seeking to bolster capital ahead of year-end, raised 400 billion won (about $295 million) at 4.73%, and JB Financial Group is also pushing ahead with a 100 billion won (about $74 million) issuance, with both tapping the perpetual bond market in succession. While abundant liquidity has made the issues successful, investors are also demanding rate premiums to secure a margin of safety.

What remains to be seen is whether the capital ratios defended through high-cost funding translate into actual corporate value enhancement and profitability protection. Perpetual bonds issued by financial holding companies are conventionally called after five years, effectively exposing issuers to refinancing risk and rate resets every five years. If the volume of high-rate perpetual bonds continues to grow, the increased interest burden could become a structural constraint that erodes the group's net profit and its capacity to build common equity capital.

(Dollar figures are approximate, converted automatically at 1,000 won = $0.738, the rate on Nov. 8, 2026.)

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.